Alibaba: The Short-Term Weakness Might Persist

Alibaba Group Holding (BABA) went public last year in September, but since then, the stock has had a woeful time on the stock exchange. In fact, Alibaba shares now trade near 52-week lows, having declined over 33% in the last one year. This is despite the fact that Alibaba’s top and bottom line is growing at an impressive pace.

Last quarter, the company posted 28% growth in revenue and a 30% increase in adjusted net income. The e-commerce major reported notable year-over-year growth in both its top and bottom lines mainly due to an expansion in the number of new active buyers.

This significant growth in Alibaba’s financials was driven by substantial growth in the number of consumers visiting its marketplaces to shop.

Concurrently, the company also saw an expansion in the quantity and frequency of transaction in its key product categories last quarter. Moreover, Alibaba also witnessed robust growth in mobile and mobile monetization. But, all is not well for Alibaba, and there are some reasons behind the drop in the company’s stock price.

What gives?

Alibaba has trimmed its sales forecast for the forthcoming quarter and now estimates gross merchandise volume, or GMV, to be in mid-single digits. This is below its earlier forecast for the quarter, and is primarily a result of a drop in consumer spending on Alibaba's online growth platforms.

The company might be seeing healthy growth across its online transaction platforms, but with a continued reduction in consumer spending on its online growth platforms, Alibaba has lowered its sales estimate in terms of GMV for the ongoing quarter. For example, in August, Alibaba declared GMV growth of 34% during the three months period ending in June to 673 billion yuan, or $106 billion, the weakest growth in over three years.

The company currently believes its forecasted growth in the AliExpress business will slow to low double-digits for the quarter owing to weakening currency in Brazil and Russia. Hence, although demand for Alibaba’s products and services might be strong, the weakening global pricing environment is leading to unsold inventory.

Moreover, Alibaba is believed to have greater risk owing to its “Made in China” status. The slowing growth of Alibaba in China has pushed investors in approximately $70 billion of loss, and the Chinese government has tagged Alibaba to be facing a credibility crisis for being unsuccessful in controlling fake merchants selling forged goods and increasing deceptive promotions.

The online merchant is expected to suffer losses till the economic slowdown in China comes to an end.

A look at the positives

Investors, however, should not ignore the growth moves adopted by Alibaba. During the June quarter, Alibaba gained 307 million monthly active users on its mobile commerce apps, up 18 million from March and an increase of 63% on a year-over-year basis.

Alibaba has also entered a strategic agreement with Suning, which is a key consumer electronics retail chain in China having over 1,600 stores in 289 cities. This planned alliance is expected to further diversify Alibaba’s already robust product base, expand its reach across the globe, and provide an in-store experience to test products and strengthen the after-sales service.

Despite significant losses faced for the quarter due to the ongoing weakening Chinese economy, Alibaba is continuously diversifying its products and services base by entering into an alliance with Suning. This could help the company offset the weakness that it is seeing in select markets by diversifying its customer base.

Conclusion

In the short run, Alibaba does not look like a good investment considering the difficulties that it is facing. However, investors should pay close attention to the company’s long-term prospects as once the situation in its end markets improves, Alibaba might be able to reverse its slump.